TITLE 34. PUBLIC FINANCE

PART 4. EMPLOYEES RETIREMENT SYSTEM OF TEXAS

CHAPTER 85. FLEXIBLE BENEFITS

The Employees Retirement System of Texas (ERS) proposes an amendment to 34 Texas Administrative Code (TAC) Chapter 85, concerning Flexible Benefits, by amending §85.5 (Benefits).

ERS administers a constitutional trust fund and was established by the Texas Constitution, as currently set forth in Tex. Const. art. XVI, §67, and further organized pursuant to Title 8, Tex. Gov't Code, as well as 34 Texas Administrative Code, §§61.1 et seq.

An amendment to §85.5 is proposed in order to reflect a change in federal law regarding the maximum contribution amount for dependent care flexible spending accounts.

GOVERNMENT GROWTH IMPACT STATEMENT

ERS has determined that during the first five-year period the amendment will be in effect:

(1) the proposed amendment will not eliminate a government program;

(2) implementation of the proposed amendment will not require the creation of new employee positions or eliminate existing employee positions;

(3) implementation of the proposed amendment will not require an increase or decrease in future legislative appropriations to the agency;

(4) the proposed amendment will not require an increase or decrease in fees paid to the agency;

(5) the proposed amendment will not create a new rule or regulation;

(6) the proposed amendment will not expand an existing rule or regulation and will not repeal an existing rule or regulation;

(7) the proposed amendment will not increase or decrease the number of individuals subject to the rules' applicability; and

(8) the proposed amendment will not positively or adversely affect the state's economy.

Mr. Blaise Duran, Director of Group Benefits, has determined that for the first five-year period the amendment is in effect, there will be no fiscal implications for state or local government or local economies as a result of enforcing or administering the amendment; and small businesses, micro-businesses, and rural communities will not be affected.

The proposed amendment does not constitute a taking. Mr. Duran has also determined that, to his knowledge, there are no known anticipated economic effects to persons who are required to comply with the amendment as proposed, and the proposed amendment does not impose a cost on regulated persons. Increasing the maximum contribution amount will potentially lead to a reduction in FICA taxes, including the employer portion.

Mr. Duran also determined that for each year of the first five years the amendment is in effect, the public benefit anticipated as a result of adopting and complying with the amendment would be greater tax savings to individuals who are currently paying more than $5,000 in dependent care costs each year, as well as corresponding savings for those individuals' employers. This change imposes no new requirements on individuals, and taking advantage of the increased contribution limit is at the discretion of the individuals utilizing the benefit.

Comments on the proposed amendment may be submitted to Cynthia C. Hamilton, General Counsel, Employees Retirement System of Texas, P.O. Box 13207, Austin, Texas 78711-3207, or you may email Ms. Hamilton at General.Counsel@ers.texas.gov. The deadline for receiving comments is Monday, May 18, 2026, at 10:00 a.m.

The amendment is proposed under Tex. Gov't Code §815.102, which authorizes the ERS Board of Trustees (Board) to adopt rules necessary for the administration of the funds of the retirement system and regarding the transaction of any other business of the Board; Tex. Ins. Code §1551.206, which authorizes the Board to develop, implement, and administer flexible spending accounts and include any benefit that may be included under federal law; and Tex. Ins. Code §1551.458, which authorizes the Board to adopt rules regarding flexible spending accounts.

No other statutes are affected by the proposed amendment.

§85.5. Benefits.

(a) Benefits available for selection by participants. A participant may elect, in accordance with the procedures set forth in this section, one or both of the following benefits, subject to all the requirements and conditions contained in these rules:

(1) health care reimbursement plan;

(2) dependent care reimbursement plan.

(b) Health care reimbursement plan.

(1) General purpose health care reimbursement account. Pursuant to the health care reimbursement plan, a participant may elect to receive reimbursements of certain health care expenses which are excludable from the participant's taxable income. The general purpose health care reimbursement account is intended to be qualified under the Code, §105, is an optional benefit under the flexible benefits plan, and constitutes a separate written employee benefit plan as contemplated by the Code, §105, and Treasury Regulation 1.105-11.

(2) Maximum benefit available. Subject to the limitations set forth in these rules, hereafter referred to as the plan, to avoid discrimination, the maximum amount of flexible benefit dollars that an employee may receive in any plan year for health care expenses under the health care reimbursement plan is the amount permitted under the Code, §105. Even if permitted under the Code, in no event shall the amount available exceed $5,000 in a plan year. An employee may prepay the health care election amounts for the remainder of the plan year in anticipation of termination, retirement, or a period of leave without pay.

(3) Limited purpose health care reimbursement account. An employee who elects to participate in a consumer directed health plan with a health savings account as permitted by Subchapter J, Chapter 1551, Insurance Code, may elect to participate in a limited purpose health care reimbursement account. This limited purpose health care reimbursement account may only be used to reimburse eligible dental and vision care expenses incurred during the benefit plan year or permitted carryover period. The limited purpose health care reimbursement account is intended to be qualified under the Code, §105, is an optional benefit under the flexible benefits plan, and constitutes a separate written employee benefit plan as contemplated by the Code, §105, and Treasury Regulation 1.105-11.

(1) Pursuant to the dependent care reimbursement plan, a participant may elect to have payments made or receive reimbursement for dependent care expenses. The dependent care reimbursement plan is intended to be qualified under the Code, §129, is an optional benefit under the flexible benefits plan, and constitutes a separate written employee benefit plan as contemplated by the Code, §129.

(2) Maximum benefit available.

(A) Subject to any limitations imposed by these rules, hereafter referred to as the plan, to avoid discrimination, the maximum amount that an employee may receive in any plan year in the form of payment of or reimbursement for dependent care expenses under the dependent care reimbursement plan is the lesser of:

(i) the employee's earned income for the plan year (after all reductions in compensation including the reduction related to dependent care expenses);

(ii) the earned income of the employee's spouse for the plan year; or

(iii) the amount permitted under the Code, §129. [~~Even if permitted under the Code, in no event shall the amount available exceed $5,000 in a plan year.~~]

(B) In the case of a participant's spouse who is a full-time student at an educational institution or who is physically or mentally incapable of caring for himself, such spouse shall be deemed to have earned income of not less than $200 per month if the participant has one dependent and $400 per month if the participant has two or more dependents in accordance with the Code, §21.

The agency certifies that legal counsel has reviewed the proposal and found it to be within the state agency's legal authority to adopt.

Filed with the Office of the Secretary of State on March 31, 2026.

TRD-202601440

Cynthia Canfield Hamilton

General Counsel and Chief Compliance Officer

Employees Retirement System of Texas

Earliest possible date of adoption: May 17, 2026

For further information, please call: (877) 275-4377